Simplifying the Stock Market

The stock market is a simple concept by which many people buy shares of public companies. Since 1790 there has been a stock exchange of some form in the United States, and "the market" has been the financial benchmark of the nation?s economy.

There are numerous categories of stock to suit

Blue-chip stocks: These include several of the most prestigious well-established large companies. Many of these are household names such as Disney, IBM or Coca-Cola. These are typically older companies that the public has come to know and trust.

Growth stocks: As the name might suggest, these stocks have strong growth potential. These are typically companies that are newer, busily doing research and developing products and services in hopes of achieving growth. Much of the profits are fed back into the companies themselves.

Value stocks: These are stocks in companies that, for one of many reasons, are undervalued. They are stocks that are selling at a low price, but when analyzing the company?s sales, earnings and looking at other factors, give indications that they should be selling for a higher per share price.

Cyclical stocks: The earnings on these stocks are tied very closely to the overall business cycle and economic state. Examples include the housing industry and industrial equipment companies.

Defensive stocks: These remain stable in any economic conditions, such as food companies, drug manufacturers or utilities. These are stocks in companies that manufacture the necessities that people will need in any economy.

Income stocks: These pay higher-than-average dividends over a sustained period. They are typically long-established companies with stable earnings or utilities such as phone companies.

Speculative stocks: These are stocks in emerging companies that are speculating on their future earnings and revenue. These are risky investments since the company may or may not reach their intended future goals.

One of the keys to making money in the stock market is patience. The market traditionally earns money over time. Therefore, if you are looking to hold onto stocks for a number of years, experts say you should end up ahead. Conversely, buying stocks for the short term is far more risky because stocks can be quite volatile in a shorter time frame.

The type of stocks you choose will be based in part on your goals and in part on your level of risk tolerance, which refers to how comfortable you are with the prospect of losing your initial investment. Buying stock in an emerging company, for instance, is clearly a greater risk than buying stock in a long-standing giant in the industry. However, you won?t earn the big rewards that you might with the riskier stock. Likewise, if you are seeking income, you will look for stocks that are low-risk and low-reward but pay steady dividends. It is often recommended that you start out with companies you already know something about.

If you do adequate research, buy several stocks, diversify and plan to stay in the market for a while, you lower your overall potential for losing your initial investment.